The Current Financial Position Explained – October 2020
What Is Quantitative Easing?
You may have heard the term Quantitative Easing thrown around in terms of stimulating the economy. So, what does it actually mean?
Well, we know that the Reserve Bank is in charge of setting monetary policy for New Zealand. They use a number of tools to keep the economy financially stable. One is the OCR. By keeping it low it stimulates economic growth and inflation.
Another tool they use is Quantitative Easing (QE). Essentially, QE involves the Reserve Bank creating new money and using it to buy existing financial assets like bonds. The extra demand for the bonds lowers interest rates in many areas. This, in turn, creates business confidence, encouraging businesses and consumers to invest more or spend more. The end result… a boost in economic growth.
Because the Reserve Bank utilised the QE strategy, the financial crisis in New Zealand is not as bad as it could have been post-COVID. It has put the country on the road to a ‘tentative economic recovery’. [source]
“The central bank’s chief economist Yuong Ha said it would rather decide it had done too much too soon in response to the downturn caused by Covid-19, than too little too late.” They would rather overshoot their inflation target, than undershoot it, ensuring the economy is stimulated enough for a strong recovery. [source]
First Home Buyers Dominating The Market
While the recovery of the economy as a whole is still in question, it is no secret that the housing market is still booming. And a large part of that is down to first home buyers. They are hitting the market with force!
“First timers borrowed $1.3 billion in August, the highest volume on record, based on RBNZ figures dating back to 2014.” [source]
More and more first home buyers are taking advantage of releasing their Kiwisaver funds and accessing the first home grants. Some lenders are even offering special interest rates for first home buyers, allowing them to break into the competitive property market.
With interest rates at an all-time low and an easing of the lending restrictions in place, now is an attractive time for first home buyers. If you are a first home buyer and would like to understand where you stand financially, then we would love to give you the advice you need at Mortgage Suite. Reach out to us today.
Will The OCR Go Negative?
So, we have talked about the Reserve Bank’s Quantitative Easing strategy to stimulate the economy, but they also have another power up their sleeve. They can also lower the Official Cash Rate again.
Based on weak inflation data in recent months, it is highly likely that the OCR will be cut in 2021. Many economists are predicting that the OCR will go negative in the coming months [source].
Unfortunately, that does not mean that the bank will pay you to borrow their money! But, if it does happen, it will mean a reduction in interest rates. They are thought to drop below 2% in 2021. Of course, this is historically unheard of. But, economists believe it to be a necessary measure to revive the economy.
Record Home Lending
“Mortgage lending hit $7.3 billion in September, the highest value on record, according to the latest Reserve Bank data, as the market continues to defy expectations. Record low interest rates, a shortage of listings, and the end of loan to value ratio restrictions are believed to be behind the surge in housing market activity since the Covid crisis.” [source]
These unique circumstances have people wondering if now is the time to jump into their first home, upgrade the family home, or take on an investment property.
If these thoughts are running through your mind, then now is the time to seek expert financial advice. And that is exactly what we provide here at Mortgage Suite. Get in touch with us today for an obligation-free chat about where you sit financially.